Fiscal pressure from demographic changes is mounting across the globe. This column asks whether labour markets will create enough jobs. Cross-country comparisons suggest that, until at least 2050, the countries most under pressure will be Poland, Turkey, and Greece.

Economists tend to study the problem of ageing in the developed countries in terms of rising old-age dependency ratios, which express the increasing higher number of pensioners for every working-age person. We can also apply the same reasoning to the young, where rising young-age dependency ratios in developing countries by definition implies more youngsters for every person of working age. But this is not the full story.

Countries that are projected to experience rising dependency ratios are often characterised by large shares of the working-age population being economically inactive. This holds in particular for developed economies, because many of working age (housewives, unemployed) do not perform paid work at all or only part-time. Other reasons may be the existence of easily accessible and generous welfare benefits, such as early retirement and disability schemes. Reducing the inactivity among those of working age can relieve part of the fiscal pressure of ageing populations.

We focus here on what we call the “labour market space” as a potential way to cushion the effects of demography and study 50 countries worldwide that, according to the United Nations, will account for 75% of the total world population by 2050. There are two main findings:

The considerable global heterogeneity in population dynamics in the fiscal pressure of the young and old as well as in relation to the labour market space, and

the similarities among developed and developing countries.

Measuring the space

We define labour market space as the part of the working-age population that is not doing full-time paid work. The labour force participation rate measured in full-time equivalents and henceforth its complement – what we call “labour market space” – is a country-specific system variable. A vast number of factors determine whether a country has a high or low labour market space. Examples are the generosity and accessibility of social benefits, labour market rigidities (trade unions, minimum wages, employment protection), habits and norms with respect to female labour participation, active labour market policies, (absence of) early retirement schemes, working hours and holidays legislation, and tax-induced financial incentives to paid work. In most Anglo-Saxon countries, with a mean and lean welfare state, flexible labour markets, and a strong financial incentive to do paid work, the labour force participation rate is high and thus labour market space is low. Low labour force participation rates and thus a larger labour market space characterises other countries, mainly in continental Europe.

Figure 1 gives a schematic view of a population pyramid, where we define the young-age population as younger than 15 years, the old-age population above 65 and the working-age population between 15 and 65. The labour market space is part of the latter, where in most countries the space is larger for the female than the male population. It follows that the working part of the working-age population does not only have to care (in fiscal terms) for the young and old, but also for working-age persons. For many of the developed economies, the labour market space in the first decade of this century was always slightly above 40%, so measured in full-time equivalents 40% of the working age population is not doing paid work. For developing economies, the space varies wildly. Asian and South-American countries have far less space than African countries according to the Millennium Development Goals indicators.

Figure 1. Categorised population pyramid

Source: Groot and Peeters (2011).

Pressure-to-space

Per country, we measure fiscal pressure by fiscal spending on young and old people, which includes public expenditures on education, family support and public pensions, where healthcare costs are excluded because we lack data on the age-specific healthcare expenditures. We express this fiscal pressure as a percentage of GDP. Figure 2 pitches labour market space on the vertical axis against demographic pressure on the horizontal axis, with four quadrants, each with either a low (high) demographic pressure combined with a low (high) degree of labour market space. In quadrant I (north-west), the demographic pressure is low and there is ample room to raise participation and hence potential production. Quadrants II and III are intermediate cases, comparatively better than IV either because pressure is lower (III) or potentially the burden of the pressure can be relieved by reducing space (II), but worse than I because pressure is higher (II) or space to relieve the burden is limited (III). The situation of a country in quadrant II can be as inconvenient as the situation of a country in quadrant III.

Figure 2. Demographic pressure versus labour market space

Source: Groot and Peeters (2011).

Note: The scaling on the x-axis is indicative; it can also be negative.

In order to rank countries we define the pressure-to-space indicator for a country in a certain year. Here, the nominator represents the change in fiscal pressure on the young and from the old, from period to period, and the denominator represents the labour market space. This indicator thus divides the x-component (horizontal axis) by the y-component (vertical axis) of Figure 2. This indicator identifies which countries, given their labour market space, will feel the (fiscal) pressure most.

The empirical outcomes

We illustrate the global overview in Figure 3, with the change in pressure of the young and old in 2050 in comparison with 2010 on the horizontal axis and the labour market space in 2008 on the vertical axis.

As follows, most developing countries face a rather low fiscal pressure mainly because of a low population share of old-aged people and low public expenditures to the dependent population as a share of GDP. In terms of the three welfare regimes of Esping-Andersen (1990), most OECD countries of continental Europe combine high pressure with high labour market space, whereas a lower pressure and lower labour market space characterises most OECD Anglo-Saxon and Scandinavian countries. During this time span of four decades, many countries will face an increase in fiscal pressure up to 28 percentage points of GDP. Interestingly, there is also a limited but heterogeneous set of countries facing a decrease in fiscal spending on dependents during this period.

Figure 3. Pressure versus space in 50 countries

Source: Groot and Peeters (2011).

Table 3 reports the ranking for four periods: from 2010 to 2020, from 2010 to 2030, from 2010 to 2040, and from 2010 to 2050. As follows, Poland, Turkey, and Greece rank one, two, and three in the last period (as Figure 3 illustrates). While Turkey is not ranked among this group of 50 countries in the earlier periods, Poland ranks number one in each period due to its strong demographic ageing developments and relatively high pension costs. The table also lists the lowest-ranking countries, being in 2050 Uganda, the Democratic Republic of Congo, and Tanzania.

Table 3. The pressure-to-space ranking

2020-2010

2030-2010

2040-2010

2050-2010

1

Poland

8.6

Poland

14.6

Poland

17.4

Poland

28.1

2

Czech R

7.8

Austria

11.0

Austria

16.8

Turkey

21.8

3

Japan

6.7

Luxembourg

9.9

Luxembourg

16.2

Greece

21.1

…

…

…

…

…

…

…

…

48

Uganda

-1.7

DR Congo

-2.4

Pakistan

-2.2

Tanzania

-2.1

49

Brazil

-1.8

Bangladesh

-3.4

DR Congo

-3.2

DR Congo

-3.2

50

Bangladesh

-3.2

Uganda

-4.4

Uganda

-5.8

Uganda

-6.0

Source: Groot and Peeters (2011).

Conclusion

There is thus considerable heterogeneity in population dynamics, public coverage of dependents, and labour market participation across the world. Policies should be geared towards relieving the mounting fiscal pressure, in particular in Poland, Turkey, and Greece. Reforms should start sooner rather than later, in view of the mounting fiscal costs (to more than 20% of GDP in comparison with 2010).